Large-cap funds should anchor investors’ long-term portfolio

I have put Rs3,000 each in HDFC Top 200, IDFC Imperial Equity Plan A, L&T Equity, ICICI Prudential Focused Bluechip Equity and Rs5,000 in IDFC Premier Equity Plan A over the last three years through systematic investment plans (SIPs). I intend to continue it for the next 20 years and accumulate Rs1 crore. Am I on the right track? I have noticed that IDFC Imperial Equity has only 3-star rating now. Shall I stop my SIP in this scheme and put the money in some other scheme as lump sum? Please note that all the above investments are direct ones.

—Bal Govind

You invest Rs17,000 a month in a diversified portfolio with a large-cap bias. More than 70% of your portfolio is flowing to large-cap-oriented funds. Even the mid-cap fund (IDFC Premier Equity) in your portfolio has about a third of its investments in large-cap stocks. You will do well to add another mid-cap fund to your portfolio especially considering the fact that you are investing for the long-term (20 years). As you indicate, IDFC Imperial Equity fund has not being doing very well over the past several years, and can be replaced in your portfolio. I would suggest a move to a good mid-cap fund such as Religare Mid-cap fund or HDFC Mid-cap Opportunities fund in its place. The other funds can remain as they are.

If you continue with this quantum of investment in such a portfolio, you should not have any trouble reaching your Rs1 crore target. Given your pace of investment, even assuming a modest 10% compounded annual growth rate for the portfolio, you are set to reach close to double your target at the end of the time frame set by you.

I have decided to go with equity mutual fund investment instead of looking at stock for long-term investment. What is the kind of allocation I should make in various mutual fund categories (percentage of the fund that I should invest in large-, small- and mid-cap, and diversified equity) from a long-term returns perspective? I can then figure out the investments into some important funds in these categories.

—Karan

Large-cap-oriented diversified funds have produced sustained good performance in the Indian mutual fund market. Hence, such funds should anchor an investor’s long-term portfolio. A 50-60% allocation to 2-3 funds from this category would be ideal. Small- and mid-cap funds which invest in growing companies, can take up not more than 30% of the portfolio. It would be good to select 2-3 funds from different fund houses in this category to diversify across stock-picking styles. If you choose to invest in international and/or thematic funds in your portfolio, please ensure that, put together, they do not exceed 10-20% of the portfolio.